New Study Shows Hazards of Credit Card Debt

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Like a hamster on a wheel, some people who use credit cards to meet daily expenses find themselves in a cycle that's tough to stop.

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After the financial crash in 2008, credit cardholders cut back on their usage and issuers cut back on their lending. As a result, credit card balances fell for 27 straight months, and revolving credit declined $178 billion from its peak.

But there’s still a large group of Americans who are indebted to their credit card.

A new study released by research firm Demos, “Understanding the Debt Difference” [PDF], examines credit card usage among low- and middle-income families and shows the effects of credit card indebtedness. It compares households that had credit card debt – defined as households with revolving balances on their credit card for three months or more – to a non-indebted group that did not carry a balance on their credit cards.

According to the study, indebted families use credit cards to pay for basic expenses and make up for their lack of assets. However, this reliance on a credit card increases a family’s economic vulnerability and increases the reliance on credit cards in the future. The families with credit card debt are more likely to have experienced unemployment, an unexpected medical expense, or a loss of health insurance.

“This study is a reminder that credit card debt has harsh consequences for the households which have no other options,” says Bill Hardekopf, CEO of and author of The Credit Card Guidebook. “If you don’t have assets, a credit card may be the only way to pay for essentials. But once you are caught in this trap, it is difficult to save and build up the resources that will help you get through the next crisis. It becomes an unending cycle of increasing debt and swelling interest payments.”

Among the low- and middle-income households that carry credit card debt, the average card debt was $9,799. More than half (52 percent) have had the same or more debt than they had three years ago, and 54 percent of these households have been late on or missed a credit card payment. Meanwhile, 37 percent percent of families are still paying off a credit card they canceled.

Here are additional results of the study:

  • 41 percent of indebted families did not have have enough money in their checking or savings accounts – and as a result have used a credit card – to pay for basic living expenses such as rent, mortgages, groceries, utilities, or insurance. Only 18 percent of non-indebted households used credit cards to pay for these basic living expenses.
  • Indebted households are less likely to be homeowners than households without debt. If they do have a home with equity, indebted households have 54 percent less home equity (an average equity of $93,564) than households without credit card debt (an average of equity of $166,997)
  • 39 percent of indebted households had at least one member of the household lack health insurance in the last three years versus 25 percent for non-indebted households.
  • Working-age families with credit card debt were more likely to be unemployed for at least two months in the last three years – 37 percent of working-age families with credit card debt experienced this level of unemployment, compared to 22 percent of households without credit card debt.
  • One startling note: Indebted households were more likely to hold savings or checking accounts, but the value of these accounts was lower. These liquid assets were held by 82 percent of households with credit card debts. The average value was $4,348. But 79 percent of households without credit card debt held liquid assets, with an average value that was more than double – $9,845.
Stacy Johnson

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